`Golden parachutes' tarnished

Backlash against lavish exit packages leads some executives to reject them


At a time when executives routinely score payouts worth tens of millions of dollars for selling a company, Mercantile Bankshares Corp. chief Edward J. "Ned" Kelly III could have bargained for a bigger potential "golden parachute" when his contract was up for renewal this year.

But he didn't. Instead he surprised board members by suggesting they drop provisions in his contract that would have brought him a $9 million windfall when and if the Baltimore bank were sold.

In the world of executive compensation, where exit packages for corporate America have become a lightning rod for shareholders and corporate ethicists, this might be the equivalent of man-bites-dog. It is also a sign that boards and executives at Mercantile and at other major corporations where such payouts have been waived are sensing the backlash against the arrangements.

"People are frankly irritated at the big payouts people are getting," Kelly said. "I know this may sound silly coming from a corporate CEO, but I thought it was the right thing to do."

Golden parachutes became popular during the 1980s merger mania as a way to ensure that entrenched executives wouldn't turn down a would-be acquirer to save their own jobs. Now critics say the arrangements have mushroomed so much they could encourage an executive to sell out.

Besides, critics say, the idea that executives need severance after losing a job seems antiquated in an era when they make multimillion-dollar salaries and hold troves of stock. In fact, when Mercantile directors obliged Kelly and eliminated his parachute, they turned around and awarded him $5.5 million of restricted stock.

A parade of executives has lately pocketed hefty separation payments. Gillette Co. CEO James Kilts got $165 million last year as a result of the household product maker's sale to Procter & Gamble Co. In what may be a new high-water mark, three North Fork Bancorp executives are expected to reap nearly $300 million from the regional bank's acquisition by Capital One Financial Corp., announced last month.

And at Baltimore's Constellation Energy Group Inc., board members padded the golden parachute for CEO Mayo Shattuck a few weeks before they agreed to sell the utility and energy trader to FPL Group Inc. of Juno Beach, Fla., late last year. Just how sweet a deal Shattuck received can't be determined from disclosures made so far, but the arrangement has become a bone of contention for opponents of the merger, which still must be approved by regulators.

Shareholders have been agitating to limit golden parachutes in recent years. They have fought to be able to approve any severance package, whether awarded when an executive is ousted as part of a shake-up or a takeover, that's worth more than triple the sum of an executive's base pay plus bonus.

That proposal has garnered a majority of the ballots cast at many corporate annual meetings, including at investment bank Morgan Stanley this month. More than two dozen shareholder proposals on golden parachutes have been filed at companies this year.

"Severance payments may be appropriate in some circumstances," said Julie Gozan, director of corporate governance at Amalgamated Bank, a union-owned bank in New York that has sponsored the proposals at companies where it owns shares, "but due to the enormous potential cost of these agreements, there should be some oversight."

In Congress, Rep. Barney Frank has introduced legislation to require that all golden parachutes be subject to shareholder approval. The bill, which the Massachusetts Democrat unveiled in November, has picked up more than 20 co-sponsors in the 435-member House but is likely to face stiff opposition from business groups.

Some executives have given up severance safety nets. Kenneth Lewis, CEO at Bank of America Corp., gave up his severance in 2003, followed by Wachovia Corp. CEO Kennedy Thompson in December. Company officials say their decisions were in keeping with efforts at the companies to link pay to performance.

Mercantile's Kelly said those moves prompted him to think about making his own.

"CEOs tend to look at peers in their industry, and they tend to follow each other on compensation issues," said Broc Romanek, editor of CompensationStandards .com, a board advisory Web site. "Usually that means they say, `I gotta have me some of those,' but in this case it looks like it's working in reverse."

Nearly 80 percent of companies in the Standard & Poor's 500 maintain golden parachutes for executives, which are technically called change-in-control payments. On top of severance, they can include accelerated vesting of stock options and restricted stock, consulting contracts, and continued access to corporate jets and other perks.

Some companies also give executives "gross-up" payments to cover their tax liabilities. Under an Internal Revenue Service rule, severance payments that exceed 2.99 times an executive's average compensation are subject to a 20 percent tax.

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